Amortization

I read a good article about the 4 kinds of return a real estate investor can expect. Those mentioned were cash flow, appreciation, amortization, and tax shelter. I agree that all of these are important but I would put leverage above all of them on my list. Leverage is what makes it all work.

If I wanted to buy $100,000 of gold I would have to put up $100,000. If the gold went up $10,000 I would receive a 10% return on my investment. If I bought a $100,000 house with $10,000 down and a $90,000 loan and it went up $10,000 I would receive a 100% return on the investment in appreciation alone. Then I can add in the cash flow, amortization, and tax shelter for an even better return.

If you want to see my napkin presentation on “Why Invest in Real Estate”, grab a piece of paper and a pencil and start drawing. At the top of the page draw a seesaw or teeter totter. Remember how you had to move the board off center so that the little kid, sitting on the long end of the board could hold up the bigger kid? Draw a $10,000 bag of money on the longer end holding up a $100,000 bag of money on the short end. Now you have a mental picture of leverage.

Next draw a little house with a big arrow pointing up on the left side. This gives you a mental picture of appreciation. Real Estate always goes up in value over time. On the right side of the house draw a big arrow pointing down. This gives you a mental picture of depreciation or tax shelter. The government lets you write down the value of this appreciating asset. Pretty slick. Below the house draw a rectangle and then draw a line from the bottom left corner to the top right corner of the rectangle. The top triangle represents interest your tenant is paying in the form of rent. Because you own the house you get to deduct the interest on your tax return. The bottom triangle represents your equity buildup. Every time you collect rent and make a payment on your loan the tenant is increasing your ownership in the property. It doesn’t get any better than this.

Now stick this napkin presentation on the TV, your boat, your golf clubs or anything else that keeps you from taking advantage of this unique time to buy real estate. If you don’t draw well ask me and I’ll email a good copy to you.

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The Truth in Lending Act was introduced in 1968, with the intention of protecting consumers from predatory or misleading lending practices. By mandating that lending companies provide in-depth information about credit lending policies, lawmakers hoped to promote informed and intelligent public use of credit. Today, the Truth in Lending Act of 1968 forms the basis for much of our more complicated legislation concerning lending.

One of the major requirements of the Act is that companies make it abundantly clear to borrowers what the major points of the lending agreement are. It also mandated standardization for borrowing costs across companies.

The biggest part of this is to require lenders to disclose to borrowers the annual percentage rate, or APR, of loans or credit being offered. Most consumers are now abundantly familiar with bank and credit card ads which advertise “Low APR” with a rate attached. This is a direct benefit stemming from the Truth in Lending Act.

Simply put, the APR indicates how much the bank charges per year for the loaned money. This rate is shown as a percentage. It also includes any additional charges associated with the loan, and allows borrowers a clear idea of how much the lending agreement will cost overall.

Many people are unfamiliar with the somewhat complex mathematics that go into expressing interest rates in loans, and prior to the law change, banks would express the interest rate in a number of deliberately confusing ways. The APR rule reduced their ability to do this, thus adding a level of protection to the borrowing experience.

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Refinancing your home mortgage allows you to take the terms of your current loan and change them into terms that benefit you at the current time. In order to decide whether refinancing will actually save you money in the long run, it is important know how the process is carried out and where you can save money along the way.

In simple terms, when you refinance, you are taking the principal balance that is left on your current loan and transferring it into a new loan, usually with a new lender that deals with home refinancing. If you have penalties for paying off your current loan written into your paperwork, you may have to pay a higher amount than you actually owe in order to get out of the current loan terms. These penalties are there to encourage you not to pay the loan off early, because that means the bank loses out on interest you would have paid for many more years.

There will also be closing costs on the refinanced loan, just as you paid on your original home mortgage. There are some lenders who offer no-closing-costs opportunities, where they can cover those up-front fees in exchange for you accepting a higher interest rate. Whether this works out in your advantage will depend on the interest rate you can get using points.

Points are a way you can essentially buy a lower interest rate. Each point you accept is worth 1% of the total loan amount, and this amount must be paid up-front. For example, if you are refinancing $60,000 and have 3 points, you will have to pay $1,800 up-front in order to receive the lower interest rate. Some lenders will allow this amount to be financed into the loan as well, but it increases the amount you are paying interest on and raises your monthly payments, however slight the rise may be.

The terms of your loan which can be changed in a refinancing are the interest rate and the length of the loan. If you have an adjustable rate right now, it is a good idea to change that into a fixed rate before the payments get too high for you to pay. This is a valid reason to refinance, no matter how much money you may or may not save in the process because eventually most adjustable rate loans become unmanageable.

You could also refinance into a lower interest rate or to lower your monthly payments by extending the number of years the payments are stretched out over. Sometimes your current lender will change these terms themselves if you are struggling to make payments or on the verge of a foreclosure.

Figuring out how does refinancing work is pretty simple for most people, considering they have already been through the loan process at least once before. It is basically renegotiating new terms that will benefit you more at this time.

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Prepayment penalty loans are on the rise, which means mostly everyone who is buying or refinancing their loan with high loan to value or a maximum 100% financing will be required to take a prepayment penalty. Conventional lenders usually don’t require borrowers to have a penalty. Mostly, these loans are investor loans, direct lender loans, and portfolio lenders that either offer low adjustable rates or qualifies borrowers with minimal documentation. 100% (no money down) loans are usually attached with a prepayment penalty.

How to avoid mortgage prepayment penalties: always remember to ask for an option not to have it. The lender will then buy down the prepayment option by increasing your rates or your fees. Some lenders offer no prepay penalties for 100% financing if your credit meets their minimum required scores and if you can provide income documentation to fully qualify for your loans. No income, stated income, or no ratio loans typically will have a prepayment penalty.

It is very important for you to take this seriously. The penalty will play a huge factor when you want to sell or refinance your loan. When the market is going up in value and prices are rising to the tune of 20-30% per annum. Nobody thinks anything about these penalties, its invisible as far as some people are concern. But keep in mind that the prepayment penalty will cut into your future net proceeds when you sell your house. It will decrease the amount you can take out on a refinancing loan in good or bad times and the most important factor is if the property value starts to see earth you might not be able to do both, especially if you had bought your property this year and it has not appreciated as much. Mostly, all the analyst agree on one thing: all these aggressive loans that carry an interest only payment or an option loan (negative amortization) payment normally carries a prepayment penalty. That might be the most valid reason why properties will go into foreclosures and default.

Lenders are starting to have more stringent guidelines for loans that have a negative amortization feature. This means the principal balance on your loan will actually go higher each month if you choose the option that requires the minimum payment.

How can you request for the prepayment penalty to be waived by lenders?

This gets pretty tricky–and it’s actually something I have not done too much–but I always suggest it, because the reward could be very much worth the effort. Recently, we have been asking lenders to forgive the prepayment penalty portion of the loan if we were refinancing our clients’ loans. We have only been successful twice and it’s much less effort for us and the escrow company. I believe it’s pure luck because the lender actually can show you proof that you agreed to a penalty if you were to payoff the loan prior to its due date. But I would like to share something with you that might be very helpful to some readers.

If you are in a situation where you have to refinance or sell your house prior to the penalty term due to hardship, some lenders will require you to prove that you are actually in that state and cant continue further to pay your loan. Hardship comes in many forms: you have too much debt and can’t make the payments due to your current income status, property values have not gone up as much as you have thought they would and you have to payoff the loan, or maybe you have lost your job or gone on a disability status where you income has decreased. The lender will evaluate your whole situation and look into your complete financials and decide whether you qualify for the prepayment penalty to be waived.

If you are to sell your property it works a little differently. They will ask for listing agreements and they want to see some comps to justify why you are selling your house for a certain amount. You could also list things that needed to be repaired to the house, or other defects if there are any. A full disclosure of all costs of the sale will be required to show the lender that the net proceeds will come to a negative with the prepayment penalty in there, therefore you need to request for the penalty to be removed.

Remember, we are all enjoying a borrowed equity, due to prices of homes sky-rocketing. But there are signs of a slowdown. You should know that nothing will ever only go one way–it’s always a two way street. As for the real estate market, it’s always a cycle and it’s just a matter of when the next cycle will come.

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You’ll find genuinely not as quite a few home loan items out there for current home owners or those seeking to purchase a home with a mortgage as folks believe you’ll find. Basically you will find two forms of loans: fixed rate and adjustable rate. Fixed rate mortgages are nearly continually for 30 year amortization terms (360 months) with equal payments every month for the whole term. Homeowners or home buyers can also get 15 year terms, and in some cases 40 year terms. Adjustable rate mortgages (ARMs) arrive in far more flavors. You are able to get a pure monthly adjustable or yearly adjustable mortgage, or you’ll be able to get a fixed rate for a particular number of years after which the loan goes adjustable.

Let’s examine adjustable rate mortgages very first. These are one of the most prevalent sorts of home loans accessible nowadays since they may be typically one of the most inexpensive for home buyers and arrive with the lowest rates. Adjustable rate home loans are exactly what the title implies, that is certainly, adjustable. The curiosity rate that determines the quantity of awareness that the borrower pays over time adjusts, generally on a monthly basis.

The curiosity rate of the loan is tied to an “index”. You will discover many indexes which are utilised by banks and lending institutions to determine the awareness rates they provide to buyers. Indexes vary wildly and you must examine the performance history of the index rate which is being tied to your loan very carefully or else you might be getting into a loan that could adjust larger really rapidly. One of the most typical indexes employed are the LIBOR (London Interbank), Prime, COFI (Price of Funds), or COSI. The genuine awareness rate that may be given to the borrower can be a “spread” from the genuine index quantity. For example if the index is at 3% and also the distribute is 3%, then the borrower’s real awareness rate is 6%.

An critical thing to keep in mind about these forms of home loans is that even if the broker tells you that this is really a “No Fee” loan, these are producing money off the distribute. The larger the distribute, the greater the rebate, or “yield distribute premium” that the lending institution or bank pays the broker. Most of the time the broker has to disclose the volume of the yield distribute premium that they’re obtaining from the bank, but not constantly. You will find loopholes. The best way is to ask them directly how much they may be producing on your loan and then try and negotiate it down. The broker has to make some money, but they must not get rich off of your deal.

All of these forms of home loans have a “cap” which the loan can not be adjusted better than. For example, if a loan has a cap of.25% monthly, as well as the starting rate is 5%, then no matter what the index does, the adjusted rate the following month can’t be greater than 5.25%. Most ARMs have yearly caps too. Consumers have to verify these caps very carefully and insist on the lowest ones.

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Mortgage amortization is the accounting for amortized home loans. It is a process of decreasing the payment of mortgage interest and increasing the payment of mortgage principal over the period of a loan term.

For example, if you take a mortgage loan of $100,000 with 6% interest rate over 30 years; your monthly mortgage payment will be $599.55. Assuming your initial payment date starts on 1st September, your first interest payment is calculated by multiplying 1/12 of the interest rate times the loan principal; which is 1/12 x 0.06 = 0.005 x 100,000 = $500.

Therefore, on 1st September, you will be paying $500 interest; the remaining $99.55 is used to pay the loan principal; hence reduces your loan balance to $99,900.45.

This process will repeat each month until the end of your mortgage term. Each month the portion of the payment allocated to interest will gradually decrease while the portion allocated to principal will gradually increase.

For example, on 1st October, you will be paying interest of 0.005 x $99,900.45 = $499.50; and $100.05 for principal; hence reduces your loan balance to $99,800.40. On 1st November, your interest due will be 0.005 x $99,800.40 = $499; and $100.55 for principal; hence reduces your loan balance to $99,699.85.

Of course, there is mortgage calculator you can use to generate the FULL Amortization table. You just need to input your mortgage amount, interest rate and loan period.

Hope you now understand why it could be advantageous to make a larger down payment. When you put down more payment up front, you essentially reduce the loan principal and shorten the loan period; hence reducing the interest cost as well. Another way to reduce interest cost is of course to negotiate a better interest rate with your lender.

Another way some borrowers use to reduce interest cost is to increase the amount of their payment. For example, if you paid $699.55 on 1st September (instead of $599.55); you would reduce the principal to $99,800.45; which in turn would reduce the interest cost due on 1st October to $499.

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Income projections will provide the new business buyer with a concept of the performance of the business. After establishing an income projection you should develop a cash flow projection. Cash Flow is what cash will be available to cover the expenses of the business.

In a basic cash-flow model, the noncash expenses (depreciation and amortization) and interest expenses are added to the company’s net profit. This calculation provides a quick summary of the total cash available to service the projected debt. This figure is derived as follows:

Net Profit + Depreciation & Amortization + Interest Expenses = Gross Cash Flow

When you acquire a business you should look at the seller’s financials and derive a pro forma (projected) plan for 1 month to 1 year after the acquisition. This is the most critical time when a business acquisition can fail due to problems with available money.

Lenders will look at your acquisition with a few ideas in mind. One ratio lenders use is called the Debt Service Coverage Ratio. Debt Service Coverage Ratio means the relationship of available cash to pay the proposed loan.

Cash Flow Available for Debt Service

Total Principal and Interest Payments

If this ratio is less than 1.0 the lender will determine that you do not have sufficient cash flow to pay for the loan and day to day operations of the business. When acquiring a business you should analyze the business financially as a lender. If the business is struggling for regular cash needs then why should you invest your hard earned money?

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Annual Gold Prices for the past 5 years show that in 2005 the gold price had the biggest annual dollar increase, with an increase of over $80. A chart of prices over the last 30 years looks like a roller coaster.

Exploration and development expenditures include all of the costs associated with manpower and activities such as geologists, contractors, engineering, drilling equipment, metallurgical testing and economic feasibility studies.

Gold mining requires the use of specialized facilities and technology. Gold prices can fluctuate widely and are affected by numerous factors beyond the Company’s control. Gold is measured in Troy ounces, which weigh 10 percent more than the ounces used for potatoes and feathers. It’s often found in rock that contains sulfides, which when exposed to oxygen, water, and specialized bacteria produce highly acidic water.

Gold’s attractive appearance and malleability mean that it can be enjoyed as jewelry or other ornamentation and yet is easily convertible into coin or bullion. Where the price is presented in currencies other than the US dollar, it is converted into the local currency unit using the foreign exchange rate closing price on the same day.

Gold prices have surged past the $500-an-ounce mark, and more gains are predicted as investors look to protect themselves against inflation fears. They historically rise when faith in paper currencies erodes, as investors seek the intrinsic value of gold to protect themselves from inflation. Gold has continued to show strength in Asian and European trading.

Like all prices, the gold price reflects not only the inherent value of gold, but also the relative strength of the currency in which it is quoted. Costs are allocated to a stockpile based on relative values of material stockpiled and processed using current mining costs incurred up to the point of stockpiling the ore, including applicable overhead, depreciation, depletion and amortization relating to mining operations, and removed at each stockpile’s average cost per recoverable unit. While gold is a more stable store of value than paper currencies, it still remains a market in which governments have a heavy presence. Thus, taking into account the ever-shrinking value of the dollar, the real price of gold has hardly changed in a century.

Since 1982, average annual gold prices have stayed between $300 and $450 per ounce. Record upside price potential remains firmly in the hands of investors, with average annual gold prices for 2007 on track to beat the 1981 record of $614.

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In a previous article we presented a simple formula to calculate the amount of a monthly home mortgage loan payment. The formula applies to any compound interest loan. The only special equipment you need is a calculator with a power function key. That’s the key with the y superscript x (y ^ x). If you have kids in school you probably already have one.

Here is a review of monthly payment formula.

The variables are:

N = loan period in months. i.e. 20 years = 240 months.

R = interest rate in whole numbers. i.e. 8% written as 8.

P = principal amount of the loan. The amount borrowed.

Q = the Q factor. An intermediate calculation.

M = monthly payment amount

Here’s the entire formula for the monthly payment amount of a compound interest loan:

M = (P * R * Q) / (1200 * (Q -1))

Easy enough, but first you have to calculate the value of Q. Here is the formula:

Q = (1 + R/1200) ^N. Pretty simple, but you do need the power function key. N can get large.

In our earlier example we calculated a monthly payment of $418.22 on a $50,000 second mortgage at 8% for 20 years. You have paid the 2nd mortgage loan for 5 years (60 months). The pay off amount is $43,763 (rounded). This is how to calculate the pay off amount on any compound interest loan after N number of payments.

This is an easy three step process with a subtraction at the end. First calculate the growth value of the loan amount (P). P increases by a factor of (1 + R/1200) per month, so after N months the value of the principal amount of the loan would have inflated to P * (1 + R/1200) ^ N. For the current $50,000 second mortgage the calculation looks like this:

50000 * (1 +8/1200) ^60 = 74492.28 (step one)

The monthly payments have also inflated by a factor of (1 + R/1200) per month so in math talk we have a geometric series with n terms. The monthly payment part is a little more complicated and the formula looks like this:

1200 * M * ((1 + R/1200) ^N -1) / R

Plug in the actual values and it looks like this:

1200 * 418.22 * (1 + 8/1200) ^60 / 8 = 30729.49 (step two)

Now finish up by subtracting the inflated repayment value from the inflated loan amount value to get the pay off amount:

74492.28 – 30729.49 = 43762.79 (pay-off)

Once you know how to calculate the monthly payment and pay-off amount for any compound interest loan on the back of an envelope, you can noodle mortgage and car loan what-ifs from anywhere.

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Private lending is facilitated by lenders who are not supported or funded by the government. Private lending companies have to register themselves and fulfill certain criteria put forward by the law. Most private lending companies have their individual policies and work culture but are governed by the guidelines put forth by the state and federal governments.

Private lending is popular as borrowers can approach private lenders for certain loans that a government agency might not approve. Many private lending companies in the market specialize in giving credit to applicants with bad credit history. These companies are known as sub-prime lenders. They also have some customized solutions that may help a person with a really bad credit history. Still, the applicant must first check with the regular companies that lend money. There is a possibility that they may be able to offer good rates.

Private lending also becomes helpful when some loans such as mobile home loans, are not offered by Federal Housing Administration (FHA). However, as there is no government backing for these loans, they do not have low interest rates. This further implies that the loans will also be extended for people with bad credit history. However, such borrowers will be provided these loans at a higher than usual interest rate depending on the risk involved. The interest rates for mobile homeowners are decided according to the prevailing market conditions.

Private lending companies offer many types of loans such as mortgage loans and personal loans. These loans are offered to the borrowers after assessing their applications based on many parameters. These parameters are term of the loan, credit history of the borrowers and type of loan being applied. For mortgage loans, the prevalent real estate and the loan market affect mortgage rates offered by these companies. Private lending companies allow the borrowers to choose from fixed mortgage rates and adjustable mortgage rates.

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